On last Saturday afternoon, FutureDao founder Liu Yongxin was invited to participate in NEO JOY 2019 Shenzhen Station | DeFi Scenario Application and Value Capture Seminar, and as a guest, he shared “How DAICO Helps Indie Gaming Raise Funds?”. Please read the transcript of Our founder’s speech. The transcript is translated from the original Chinese.
I am Liu Yongxin, the founder of NEL. We have done a lot of NEO infrastructure before, including contract editor, blockchain explorer, wallet, etc., as well as some contract ecosystem, like NEO domain name service NNS. We are also doing a DAO. We call it FutureDao. DAO is a decentralized autonomous organization. What we are doing is to combine DAO with the financing model. After combining the financing mechanism, we can provide economic incentives for the development of DAO.
First, what kind of scenario should DAO be applied to? What kind of demand would require a DAO to finance?
First of all, we have a judgment about the future. The future is a world of cultural prosperity. Because of the rise of artificial intelligence, many humans will be replaced. Most people will not work. People may have a lot of time to consume culture such as movies, animation, games, and so on. But these cultural and creative products have some characteristics. It has a niche, and popularization features. Take a game as an example, it may be popular for a while, then it becomes no popular, and it is possible that a game may never be popular, but some players still like to play such a game.
For the start of the project, it needs funds. At this time, if you go to the traditional financing method, the investment institution may feel that the risk of your cultural product is high, so its cost will be high, that is Its uncertainty is too great. But for a player, or for a fan, he is willing to support a project like yours. Even if he doesn’t make money on this project, you lose money, but as long as there is a product, he can still use it, appreciate it and is satisfied when he sees it, so it has the characteristics of a community.
Let’s look at whether traditional financing meets the needs of such cultural and creative product financing?
Let’s look at the traditional Internet equity crowdfunding. After the rise of crowdfunding websites, the concept of equity crowdfunding on the Internet was very hot in the past few years, including many large companies doing it, but it became an unsuccessful model very quickly. Why? Because this kind of equity crowdfunding lacks liquidity because its liquidity is the same as the traditional way, you either go public or exit through subsequent financing, so its liquidity is very poor, you have no good exit channel, and at the same time, the use of funds is opaque. After you have adopted the method of equity crowdfunding, no one can supervise the entire usage of funds. The platform will not do such supervision, and users have no means to do it either. At the same time, for a project, there is no strong sense of participation, there is no way to participate, and there is no ability to do detailed due diligence and so on.
Later, we had ICO. ICO was very successful. Let’s take a look at how it went over the past few years. The entire ICO prime time was 2017, and the funds raised through ICO has exploded. Why was ICO successful? Just because it has very high liquidity after you finance with ICO, you get your tokens listed at the exchange the next day, and then you can exit. Its core problem is that such funds lack supervision, so it has a lot of scams, and it was finally banned by governments. In addition to regulatory issues, ICO has another problem. For a start-up project, it is to raise money for a white paper. This is the case for tens of millions of dollars. For these project teams, is there any motivation for there to continue to develop projects?? And you have so much money in such an early stage, your income and risk are actually not matched. But why are you still willing to participate? Because of the high liquidity, the risk of early investors can be released through high liquidity. This model can work when the market is good, but when the whole market is not good, ICO will not fall before it’s supervised.
Let’s look back at the advantages of the traditional financing model.
Adopting a traditional multi-round financing model, a venture capital project from angel round to round A, round B, and round C, it has been financing non-stop. It can carry out a valuation with the development stage of the project. This valuation is risk pricing. At the same time, early investors can exit from the subsequent financing, which is motivating for early investors. An angel investor can exit in the A round. I don’t need to wait until it’s listing. This is actually the advantage of traditional financing. We find that the current mainstream financing situation is still the same, why? It is because the core is that it has a risk pricing here, who will do these, professional financial institutions will make a risk pricing for your project, and it has follow-up post-investment management and exit operations.
Then we imagine how the advantages of such financing can be combined with the blockchain?
So let’s think about whether there is a better financing mechanism for the blockchain project. It was also the first time in 2017 that the combination of DAO and ICO was proposed, which was called DAICO. What are the core characteristics of the DAICO? At that time, the core feature of the concept was governance. After you have finished financing, the investors are involved in the project governance. I can allocate funds from the governance fund pool to the project operator according to the development stage of your project. Therefore, it mainly evades the risk of fraud and scams.
But the earliest version of the DAICO mechanism did not take into account many issues, such as liquidity and early investor incentives. We believe that a good DAICO mechanism needs to solve three basic problems, one is the investment incentive issue of early investors, the second is the liquidity of investors exiting, and the third is an issue of post-investment governance.
First, let’s take a look at the issue of this investment incentive. We have just talked about multiple rounds of financing. We can use a mathematical fitting to fit multi-round financing through a straight line. We can have a continuous Curve, the X-axis of this curve is the circulation of Token, and the vertical axis is the price of Token. As the circulation of Token increases, its issue price will rise. The market value of this project means that we take a point in the Token circulation and form a triangle. The area of this triangle is the total amount of your financing. This total amount can be approximated by our traditional multiple rounds of financing because our multiple rounds of financing have fixed prices and a fixed number each round, so it is an area of a rectangle. At this particular point, the traditional multi-round financing was fit by the area of the triangle which is equal to the sum of the rectangular areas.
What are the characteristics of such a way?
It is a process of continuous financing, and the price of this token will continue to increase with the increasing number of issuance. It shows that with the development of your project, the valuation of this project is rising, and the concept is similarly expressed. So what kind of function does it have? It is the function of implementing risk pricing. At an early stage, projects have low prices and high risks, while at a late stage, projects have high prices and low risks, so they can realize a function of risk pricing.
We put such a financing model, such a curve can be written into the smart contract issued by the token, at this time we have realized a continuous financing model, the price of this token is a function of the circulation, it will follow As the circulation increases, we can put the funds into a liquidity reserve pool that allows early investors to sell tokens to contracts and then exchange funds. With the increase in the number of buyers and the increase in the amount of funds bought, the amount of funds in this liquidity reserve pool will also increase, then the entire selling curve. So we can have a buy curve and a sell curve. If all our funds are used as a pool of funds, then the two curves are actually the same function, the same curve. The more people you buy, the higher the price it buys, and at this point, your early investors can get more tokens when they sell. So there will be incentives for early investors. Your early investors have low prices and high risks. But when the project develops, the fund pool is getting more and more money, and you can make a profit by selling. So two problems were solved, one is the investment incentives of early investors, and the second is the exit of early investors. Both of these problems can be achieved through the contract mechanism.
The only question we have left is governance. How do we achieve the DAO governance?
What do we pursuit for a distributed autonomous organization governance? Is the pursuit of everyone involved in the decision of this project? Is collective decision making a good decision-making method? I do not think so. From the perspective of investment, what is the investment in the early projects? We are investing in a start-up team, and we are investing in people. If we say that the whole governance, we want a completely distributed, completely democratic way to do governance, then the core of the development of the project at this time is the outcome of your governance, but this governance right is scattered. When you invest, you don’t know who will invest this project, so when you invest, you need to trust. OK, I need to believe that investors I don’t know can make this decision with me? No, so we definitely have to trust the start-up team and he has the ability to use this fund right.
DAO’s governance is not in my opinion to seek democratic decision-making but to reduce some risks of the start-up team through the governance of DAO. The role of supervision is greater than the role of decision-making, so DAO governance doesn’t lie in distributed decision-making but in the right to supervise this. Therefore, the meaning of supervision is greater than the meaning of decision-making. In this way, in the design of DAO governance, we will have several considerations.
First, the voting mechanism. Adopt such a mechanism? It is a simple majority vote, and there is no reward for voting. why? Because investment is that I don’t want to go to work, most investors do not need to participate in governance, and he has no ability to do governance, so the core of governance lies in the startup team. The result of our vote is a simple majority. This simple majority means that among the number of voters in a proposal, we realize that the minority is subject to the majority, but we do not limit the total amount of voting. I do not require the vote to reach a given percentage of the total amount to pass. As long as there are many people who voted, the majority of the votes will be subject to the majority. The end result is that there is no incentive for voting at the same time. As a result, the core strength of governance is naturally the core beneficiary of this project, that is, the start-up team. Only the start-up team has the motivation to make such a proposal because they get money from the pool of funds to do things.
At the same time, the NO vote weight is more important than the weight of the YES vote. When a start-up team has to make a proposal, they want to take most or all of the fund from the pool in one go. This is actually an attack on the proposal. When this kind of proposal occurs, all investors should protect themselves by vetoing such a proposal with the voting right in their hands.
At this time, we can make a requirement for the total amount. When the NO votes reach a certain threshold, for example, when the total number of votes reaches 30%, the proposal will never pass. That is to say, even if 70% of the total votes of your proposal have been agreed, as long as 30% of people voted to reject the proposal, they will not pass. This is to prevent 50% of the attacks, so the weight of the NO vote is more important than the right to vote, but this is only when the attack occurs, in the simple case the simple majority vote is effective.
How do we consider compliance?
Now the compliance in the blockchain financing is a very important issue because the US SEC has a very long hand and it has a lot of control. How do you think about it? If you want to promote it, you have to accept that you must consider the issue of compliance. So how do we think about it?
We believe that DAICO is a platform that does not need to fully comply with established laws and regulations. Let’s first look at the core purpose of supervision is to control risks. Throughout our mechanism, we will find that the core of our entire DAICO mechanism is also to control risks. From the financing model, we control risks and conduct risk pricing from liquidity reserves. So the core of the whole design is how to control risk. It is a completely autonomous organization. There are autonomous organizations that have their own rules for controlling risks here.
Why does our traditional financing need regulation?
Because it is difficult to achieve its autonomy. The investor does not have any management authority, because it has no way to manage the funds, so it needs the supervision of the SEC.
When we can already achieve self-government and self-control risks, do we still need external supervision? No need. If we are in line with such external supervision, its changes to the entire contract mechanism are very large. For example, from the perspective of crowdfunding, the SEC’s regulations are not more than $1 million per year, no more than $1 million. I don’t care about you. I will take care of you if it’s more than $1 million. You will have a lot of extra legal costs and compliance costs. So it may change some financing mechanisms and increase the cost of this project, but what can we control? We are not controlling the amount of money flowing, we can control the speed of capital outflows. It can achieve the same effect. If there is a risk, my investors can exit at any time. Do I still need supervision? We don’t need it.
How do we apply it? What kind of approach is suitable for such a mechanism?
I think the project with a short cycle and profit model is clear. why? Because this core lies in the increase of reserves in your liquidity reserve pool, this increase comes from two aspects. In the first aspect, more people invest in you. In the second aspect, after the project makes a profit, you can add profit to the fund pool. So how long is your profit cycle? Do you have a profit model, and we find that most blockchain projects now have no profit model. It is based on one point, that is, more people buy my token. Everyone says that I am a non-profit organization, then you are not profitable. How do you pay dividends to investors? So I think the DAICO mechanism is difficult to fit into many of our existing blockchain projects.
We all know that the profit cycle of many Internet projects is very long, so it is not suitable for such a mechanism. Then you can go the traditional way, take the traditional round of financing, and have professional institutions to invest in you. They have enough patience. But when you face ordinary investors, they have little patience, so your cycle can’t be too long. For example, indie games and mobile games. The project development cycle is usually about half a year, and it will be a little longer than a year or two, It’s not like Internet projects who are public but the project is still losing money. Either I make a project which is profitable, or the project is not successful and lose money, so it does not require you to wait too long. Movie’s production cycle can be a couple of months or several years. Even it applies to the financing of our offline cafes, homestays, restaurants, etc., which will have the cash flow to support it.
Let’s look at blockchain gaming. The combination of game and blockchain is a very important scenario.
In 2018, we organized the first blockchain game in NEO, and a lot of blockchain games were launched, but you will find that there is a problem in integrating blockchain technology into game products. What’s the problem? The blockchain threshold is too high, and there are very few users in the blockchain itself. Then there are very few users of this game. How can such a small number of users be profitable? It’s very difficult to make a profit. Of course, I think this potential is there, but at this stage, the combination of blockchain and games should not be on the product side, but in the capital and organization, we can finance through DAO, but the project itself is still a traditional game. You can distribute it on all platforms, so you can have a profit-maximizing expectation. After making money, we can add it to DAO funds.
What can we achieve?
You said that DAO is doing crowdfunding in the initial stage of a game. I have a game pricing, how many dollars a game is worth, I am also in this DAO organization, you only need to invest some money, you can play this after it’s released and you can get DAO tokens and participate in the DAO, DAO governance and future investors’ profitability. So you are not only a game player, but also an investor in this game, even if the investment does not make money, but at least you spend money to buy a game, you will not lose anything, as playing a game also takes money itself.
This is some of our designs. Therefore, one of its value is a catalyst for the public chain ecosystem, a change to the traditional ICO mechanism, and it is a platform for project financing, governance, and trading. We believe this will be one of the forms of future exchanges. thank you all.